Thursday, Dec 13, 2007
Ho Ho Ho...or is it April 1st?
Firstrung: Buy to let returns improved in 2007 - Paragon
Returns generated by residential investment property in 2007 reached 21 per cent according to Paragon. This now marks a 28-month high, with the typical landlord generating more than £34,000 in rent over the last year. The average value of buy-to-let property has also been strong, rising by 15.3 per cent over the year. Yields have remained at 6 per cent or above throughout 2007 as landlords have been able to increase rents in line with property values.
Posted by converted lurker @ 03:28 PM (807 views) Add Comment
20 Comments
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1. Urine Trouble said...
In my book the traditional rent is 1% of the property value. example £125,000.00 terrace house @ current "value" should attract a rental of £1250.00 pcm although typical rent is £450.00 - £550.00 therefore property must be worth £45- 50,000. Conclusion when buying a property offer 100 times the rental pcm, reason because rents have risen inline with property values. MY @RSE
2. techieman said...
Extremely "particularly attractive"!! - Oh well beauty in the eye of the beholder.
3. new user 2007 said...
If these surveys are for BLT with several properties, they do indeed represent around 55% of BLT i.e. around 45% have just one BLT property. But that means of the 1mn BLT mortgages outstanding, at least one-quarter are the new BLT who bought at high levels i.e. in the last 3 years. This is the group that has mortgage payments higher than rents and with no older houses to cross-subsidise with.
They are also the group that gains most from waiting until April 2008 for capital gains tax changes. Now that would be a huge number waiting to sell if they cannot get any capital appreciation. Even the BLT lender is talking up the combined (rental return plus capital appreciation as the gain). They are adding up the rental yield and capital gain, but surely most of that rent goes towards servicing the debt?
If the new BLT sell, capital gains turn to losses. Now take the people with 6 properties who have say a £1mn portfolio and say 40% equity. They have £400,000 equity. If house prices were to fall by 5% that is £50,000 i.e. they lose around 15%. That is all the trigger needed to panic the "professionals" and we will see more falls.
I think I have been quite optimistic for BLT in terms of under estimating the house price falls and over estimating equity share they hold. If anyone can see any flaws in what I consider an increasingly likely chain of events, I would be interested to know.
4. Davros said...
Is it me, or do those figures seem wildly optimistic?
Still, they're preaching to the converted, I guess.
5. techieman said...
new user - can i have a different kind of sandwhich[sic] please. Joking apart good analysis.
6. Bobsto said...
I think they just made up the numbers!
After all we know that residential property price ytd is 6-8% from reliable surveys and not 15%.
They are confusing what they would like to happen with what is actually happening.
7. denzil said...
If I worked for Paragon I would ensuring my CV was up to date.
8. drewster said...
Paragon:
- "The average value of buy-to-let property has also been strong, rising by 15.3 per cent over the year."
Government (DCLG):
- "The UK annual house price inflation rate for the 3 months to October was 11.1% and 17.1% in London"
So Paragon's figures sound plausible - a landlord with a cheap house in the north and an expensive house in London could well have seen a 15.3% average rise in the last year.
Of course, all that was before the credit crunch really took hold. We've now had several months of price falls (depending on whose figures you believe), it would be interesting to know what has happened to rent in that time too? I can't imagine rents going much higher if wages remain stagnant or the jobless rate increases, especially if some of those high-flying city boys lose their jobs!
9. george monsoon said...
He missed this bit from the end... ....."and they all lived happily ever after".
10. iguana said...
Is this the same paragon that hit the headlines on 27 November (Times online) as having become the latest victim of the credit crunch? Admittedly they were the third largest in the market (swamp?) that they inhabited, but surely such unbridled optimism for the market that they have now failed in can only be explained by the huge quantities of 'happy pills' that all of their employees now take as they have no future.
11. bearshare1616 said...
As a member of HM Forces I have lots of colleagues who have BTL property and one who has 13 BTL properties, a portfolio that he has built up over the last 5 years. Even he is the first to admit that rent is lower than mortgage repayments. Most of my colleagues are going to live in their BTL when they leave the services and therefore accept that the rental yield is lower than the mortgage but they are in fact purchasing their eventual home. The article boasts about figures that are 'pie in the sky'. BTL is simply not profitable for anybody who has bought in the last few years !! Paragon are cherry picking their statistics and examples.
12. new user 2007 said...
For the new BLT the panic will require two things. No capital appreciation and rent not covering mortgage payments. This is the people with one property who bought in the last 2-3 years (the mugs who dive in at the end buy at the peak and they must represent at least a quarter of the 1mn BLT mortgages). These will be the forced sellers…the FT says rents are below interest rates (it includes void periods, maintenance costs etc).
The "professional" BLT are the ones who will panic in the next stage i.e when prices fall. These will be the non-forced sellers. The same greed that made them smug on the rising market will also see them sell when prices start falling i.e. they will want to realise their paper gains. Paragon is clearly panicked. Given its own balance sheet, perhaps it should get a loan from its BLT customers?
13. Bobsto said...
Paragon heard the line that 82.3% of statistics are made up on the spot but didn't realise it was a joke.
They really think you just make up statistics and then they become true because you put them in an "official" press release.
14. drewster said...
@new user 2007:
BTL is a property investment
BLT is a sandwich
;-)
15. robh said...
@drewster
BLT is a good investment
BTL is just dead meat
:P
16. uncle tom said...
Paragon's share price has fallen by 80% this year, and fell by nearly 6% today. They don't have much to lose from telling a pack of porkies right now - not that honesty has ever been their strongest suit...
Where are these magical properties that can be let for a headline return of 6%? Round here, (near Cambridge) the average headline return is about 4%
I have long maintained that 6% - or 0.5% of market value per month - is the minimum rent necessary for a viable return from rented property, once the market has deflated the current bubble, and gives some semblance of stability.
Even then, this does not adequately reward the risk of a leveraged position. If the purchase price of a property is going to be 75% funded by a mortgage, the headline rental return needs to be about 8%.
As most people renting are pretty cash strapped, that isn't going to happen at present property values!
17. growler said...
@robh - LOL! you are on the money
I live in a "heated up area" being in M25/M40 zone around Garrards Cross and have seen the same house fall through 4 times - and now removed from market. I had offered very low - they didn't call me back. I guess the owner has taken if off the market following advice "to try again in the spring"
18. confused76 said...
guys
this is B/S
£38k in rent is way more than the average salary...!! Who is paying that rent
19. drewster said...
@confused,
I think you'll find the average landlord in question has more than one property. Three houses at £1000/month would net £36k per year. Still wouldn't pay your mortgage though!
20. new user 2007 said...
Now I know what Techie man meant by the sandwich comment. Apologies...BLT somehow seems to roll off the keyboard far more easily (so I doubt the above will be the last of the BLT:). Regardless, I suspect the IQ of both BTL and BLT are similar.